Forex Investment and Currency Trading

USD weakness pushes commodity prices higher
Commodity prices generally firmed in October, drawing support from a range of external factors, most notably a weaker USD. Fundamentals provided added impetus for the market, but improvements in the demand and supply picture remain tentative and are coming from a low base. Investor sentiment has improved, and a sustained recovery in investor demand could fuel a price rally. However, investors will likely be on the lookout for signs of a sustained global economic recovery, which as of now is still uncertain.

Crude oil: boosted by USD weakness, but upside is limited for now
Crude oil (WTI) prices have rallied strongly, for a time breaching the USD 80/bbl barrier, on the back of a weaker USD and supportive fundamentals. Modest upward revisions to demand forecasts by the International Energy Agency (IEA), the US Energy Information Administration (EIA), and OPEC – in line with the cyclical upswing suggested by macroeconomic indicators – also provided momentum. Furthermore, there are increasing signs of investor bullishness, as indicated by rising CFTC long open interest levels.

Gold: pushes to record high in mid-October
Spot gold prices soared in early October and reached a record high of USD 1,071/oz in the middle of the month. Investor inflows have generally been robust on the back of USD weakness, with net speculative positions on US exchanges now up by 55% from their mid-year level. The strength of demand during the Indian Diwali festival also surprised on the upside, with the World Gold Council estimating that 52 tonnes of gold was purchased – up 6% y/y. Market continues to expect USD weakness heading into year-end, and gold should regain its upward momentum once this takes hold.

Base metals: improving outlook on strong China demand
Market has become more bullish about the outlook for China’s economy. Strong car sales growth continued into September, and both exports and exports turned upwards. The strong car data is bullish for all base metals, but particularly for aluminium, given its heavy exposure to this sector.

The underlying picture, however, is still mixed. Demand from outside China remains below par, and vehicle-sector growth will remain patchy, particularly as government incentive schemes end. Therefore market expects base metals to face significant headwinds, and temporary USD strength in H1-2010 will likely result in significant pullbacks.

Agriculture: harvest delays, weaker USD, firmer energy prices
Despite a recent retracement in prices, agricultural commodities had a robust performance in October, led by grains. Cold and wet weather in the US, USD weakness, and firming energy prices have supported the really.  It is expected that large global stocks, particularly of soybeans and wheat, to limit price rallies in the short term. Cotton has also performed well in the past few weeks, rising by over 10% m/m. This is largely explained by rising expectations of a smaller world crop, mainly due to persistent wet weather and cold temperatures in the US and China, respectively. The US is the leading exporter of cotton, while China is its largest consumer. Cotton has also been lifted by increased speculative positions and a weaker USD.